3 Reasons your business might be failing and what to do about it

Suzanne Kiraly 22 November 2016 4

Canberra Business

There are a plethora of articles on the internet, which have been written about why businesses fail – and on an intellectual level, most business owners will probably recognise these reasons, or at the very least, would have heard of them. (You probably clicked on this story to see if the three reasons listed in the title of this article are the ones you already know about too.)

But there is much more to this picture. More, that is rarely discussed.

The emotional cost of business failure is the most significant factor (and not reported on very much either), as to why business owners keep on going, even when it becomes obvious that something is not working. In fact, the fear of failure has the greatest impact on the lives of those who are in danger of losing their businesses. Not only this, but possibly also their marriages, and other relationships, as well as their dignity.

In fact, the shame of failure in business in our society is a huge factor in people continuing to slog on, rather than seek help, and maybe even fail fast and get the opportunity to run a better business again another day.

According to ASIC’s Corporate Report on Insolvencies in 2014-2105: the top three reasons for failure are as follows:

  1. Inadequate cash flow or high cash use
  2. Poor strategic management of business
  3. Trading losses

No surprises there, right? What is interesting about the ASIC report, though, is this: 85% of businesses had estimated assets of less than $100,000 and 41% had estimated liabilities of $250,000 or less.

So we are talking the small end of town – which let’s face it, is the place where most businesses begin (and more often than not, cease) their journey.

According to ASIC the top three reports of “misconduct” by these businesses are:

  1. Insolvent trading
  2. Obligation to keep records
  3. Misconduct of directors

Of course, these statistics are based on reports from liquidators, so it is missing those who just pull the plug, and walk away from their businesses, without applying for bankruptcy. Most in the first three years. Assuming that these business owners came to some agreement with their creditors, they didn’t need to apply for bankruptcy and so, not all three of the “misconducts” apply to them. Whilst reasons 1 & 2 are also common to these business owners – not knowing when to stop trading and usually in a mess with their record keeping, the third “misconduct” probably doesn’t apply to most of those small business owners – as this one is more to do with honesty. Going under is rarely due to criminal activity in this tiny sector, one would think.

Last time I reported on the interview with insolvency expert, Eddie Senatore, we learnt that his number one aim is to reduce the number of businesses that go under. A very admirable goal. And so should we all be aware of this issue, as supporters of our local business community at large. But what can we do to reduce these devastating statistics?

But what can we do to help reduce these devastating statistics? Apart from “buying local” ourselves on a micro-scale, there are other measures that could help the budding entrepreneur on a macro scale.

Firstly, I would venture to suggest it’s to do with better education. Starting with school courses in fact, that address these emotional issues involved; as well as the crucial business systems and reporting side of business, which let’s face it, is the focus of school-based business courses today. It’s one thing to know about legal requirements, spreadsheets, reporting requirements, and the somewhat boring (but necessary) aspects of the administration involved in running a business, but how to run your business using all the other resources at your disposal, including seeking mentors who have been there and done that, and to feed your passion at the same time.

I can’t imagine that our business courses for school students serve to inspire the budding entrepreneurs amongst our youth. We need the hard experience of entrepreneurs that have succeeded in running and growing their businesses over the long haul to be the source to inspire young entrepreneurs to give it a go. And we need to encourage life-long learning.

As for finding mentors, and networking with other business owners, the Canberra Business Chamber is a very good starting place for those who are contemplating starting in business, and those who are keen to succeed. Especially, those already in business and who may be struggling. You need to get help from those who have the necessary experience to help you. You need to grow your business support networks.

Reports (such as ASIC’s), on business failures also largely focus on the financial aspects of business failure, yet few deal with the emotional side of business failure. It is another story altogether.

Business is tough. The stakes are high. The emotional side of failure is crippling. Those in deep trouble already, can turn to financial counselling services, such as Care Financial Counselling or ASIC’s Moneysmart site and through the peak body for financial counsellors, Financial Counselling Australia, and if in great distress, please do contact Lifeline.

But there also has to be a balance between incentivising people to take “measured” risks, and to help them to do so with their eyes wide open – with the best of business education we can provide.

It’s interesting to note on the Federal level, Prime Minister Malcolm Turnbull’s speech in relation to business and risk-taking mentions the following.

“We want to be a culture, a ­national culture of innovation, of risk-taking, because as we do that, we grow the whole ecosystem of innovation right across the economy,” Mr Turnbull said. “We ­become more experienced, more innovative, more agile, more prepared to take on risk and become a culture of ideas because it is the ideas boom that will secure our prosperity in the future.”

But mostly, this applies to the innovation space in the meeting of science, technology and the tertiary sector – a very welcome innovation indeed. But, what does this all mean for the “mum and dad” businesses out there? The huge number of small businesses that go under in less than three years?

They need help too. And if you are one of them, seek help immediately.

Photo: Courtesy of Canberra Business

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4 Responses to 3 Reasons your business might be failing and what to do about it
Chamberlains Law Firm Chamberlains Law Firm 9:20 am 08 Dec 16

SMEs are often scared about financial uncertainty (as we all often are). It is this fear that often causes complacency or even paralysis. Restructuring options are available to such businesses.

– Stipe Vuleta Director | Litigation – Insolvency & Risk Management

Suzanne Kiraly Suzanne Kiraly 11:24 am 22 Nov 16

Thanks Veronicajer for your comment and article – you are right, so many pitfalls! And rommeldog56, it’s painful to see so many retailers come and go, and yes, how on earth do those dollar shops and nail shops survive??? It’s a mystery to me too.

rommeldog56 rommeldog56 9:32 am 22 Nov 16

Some good suggestions here. It never ceases to amaze me how many small businesses close up in the major shopping centers here and are rapidly replaced by another, which lasts 12 months or less then also ceases trading. How can those “dollar shops” and the explosion of women’s nail salons can afford the high rents in the major shopping centers here, not to mention the cost of fitout ?

Veronicajer Veronicajer 8:53 am 22 Nov 16

Also, another really important factor for small businesses is of course money. How do you get money? Usually by pitching a quote and winning it and hence winning a client and cash! So for small businesses out there, if you were so sure you would win a quote but somehow failed then maybe there are some of the biggest mistakes. Found a great article that could benefit small business owners- https://technowand.com.au/why-didnt-my-bloody-quote-win/

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